Canadian dollar eyes retail sales

The Canadian dollar is unchanged in the European session, as USD/CAD trades at 1.2491. It was a banner day for the currency on Wednesday, as USD/CAD plunged 0.94%, its sharpest one-day loss since August 2021. The Canadian dollar took advantage of broad US dollar weakness as well as the Canadian CPI report. Canada releases February retail sales on Friday, with a consensus of -0.1% MoM (+3.3% prior).

Higher oil prices are also providing a boost to the Canadian dollar. There is a shortage in US oil inventories and tight supplies due to cutbacks in Russia and Libya. Oil has pushed above the USD 100 level, despite growth concerns in China, and the outlook for oil remains bright.

Hot inflation report puts pressure on BoC

Canada’s inflation levels continue to accelerate and show no sign of easing. In March, CPI jumped 6.7% YoY, higher than the 5.7% gain in February and above the consensus of 6.1%. Inflation is widespread throughout the economy, and the BoC is under pressure to get things under control, with CPI at a 30-year high.

The BoC is fortunate in that the ingredients are right for a strong dose of rate hikes to rein in inflation. The labour market is robust and the economy is showing solid growth. This means that the economy will be able to withstand a series of rate hikes, although the central bank will face the challenge of making sure it’s a soft landing for the economy, otherwise the economy could head into a recession. The BoC holds its next meeting in June, and a second straight hike of 0.50% is a strong possibility, barring any unexpected weak numbers or a sudden drop in inflation.

The BoC appears to be in sync with the Federal Reserve, as the BoC’s rate-tightening cycle could see rates rise as high as 3% by the end of the year. This should help the Canadian dollar keep pace as the Fed continues its own rate-hike cycle.

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USD/CAD Technical

• USD/CAD has support at 1.2451 and 1.2379
• There is resistance at 1.2533 and 1.2605

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